MARKET ACTIVITY / TRADING NOTES FOR DAY ENDING THURS., JUNE 4 1998 (3)
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Canada energy stocks rally on crude price rise
CALGARY, June 4 - Canadian energy stocks rallied on Thursday as crude prices rose amid expectations of further world oil output cuts by the ''Riyadh Pact'' group of major producing nations.
The Toronto Stock Exchange oil and gas subindex climbed 96.21 points, or 1.58 percent, to 6,129.76 as investors reacted to a $0.52 a barrel jump in NYMEX July West Texas Intermediate oil prices. NYMEX crude fetched $15.33 a barrel in late morning trade.
Big gainers in Toronto included Suncor Energy Inc. (SU.TO), up 0.80 to 52.10, Talisman Energy Inc. (TLM.TO), up 0.70 to 39.55, Alberta Energy Co. Ltd. (AEC.TO), up 0.75 to 32, and Anderson Exploration Ltd. (AXL.TO), up 0.70 to 16.15.
Oil prices rose as oil ministers from Venezuela, Saudi Arabia and Mexico met behind closed doors in Amsterdam to discuss dropping production by as much as 500,000 barrels a day. The cutback would follow a similar pact reached in March aimed at lifting depressed prices.
There was also speculation on Thursday that Iran may bow to pressure from the other OPEC nations to abide by production levels agreed to in the Riyadh Pact, analysts said.
''The other producers are putting pressure on Iran to cut production, so there could be 700,000 barrels cut,'' said Scott Inglis, analyst with FirstEnergy Capital Corp. in Calgary.
Despite agreeing to a cut of 140,000 barrels a day in March, Iran has increased production by 185,000 barrels since the pact was struck, according figures compiled by FirstEnergy.
Inglis said he believed that Canadian oil stocks could rise four to six percent over the next two months, and the WTI benchmark could reach the $18 mark by the fourth quarter, if the production cuts hold.
''Oil shares have hit bottom and oil prices have hit bottom and a lot of people have been waiting for that to change. Today we saw the technical bounce,'' he said.
Canadian oil producers go global in big way
The Financial Post
Canadian producers cranked up oil production outside the country by almost 47% last year, while natural gas volumes went up a more modest 4%, says a consultant's report to be released today.
Ian Doig, an independent Calgary consultant, doesn't expect to see the same sort of growth this year as low oil and gas prices are causing firms to slice capital budgets.
"I would expect the increase on the oil side will be more modest this year," he said. "A good part of the pluses in the last year have been acquisitions rather than discoveries."
The report said 40 Canadian firms produced 479,569 barrels a day of oil and natural gas liquids outside the country at the end of 1997, up nearly 50% from the 326,805 barrels that flowed daily in 1996. About 16 Canadian companies went after international gas plays and produced 597 million cubic feet of gas a day last year, compared with 576 million cubic feet in 1996.
The purchase of Norcen Energy Resources Ltd. by Union Pacific Resources Group Inc. of Texas and Gulf Canada Resources Ltd.'s sale of North Sea assets to Kerr-McGee Corp., another U.S. firm, may bring down the 1998 figures when the report is issued next year, Doig said.
Observers say factors causing firms to go global include: a maturing basin in Canada is yielding smaller finds, formerly closed countries are opening their petroleum industries to foreign operators and investors are enthused by the chance of large overseas discoveries.
"I think people have come around to the view that if you're not in heavy oil in Western Canada and you want profile, then you have to go somewhere else," said Don West, president and chief executive of Rigel Energy Corp.
The tough task of finding light oil in Western Canada convinced Rigel to shift its attention to the North Sea, where it has drilled several wells and bought land.
Bob Ohlson, president of Niko Resources Ltd., which is producing gas in India, said the potential prizes -- bigger reserves and sometimes better prices -- are worth the difficulties of longer lead times, higher costs and equipment sourcing headaches. "It's not easy to walk into a new country and do a deal. It takes a certain amount of time and expertise."
In total, 200 Canadian companies held land, made sales or had operations in 121 countries in 1997.
Doig gathered data from annual reports, press releases and personal contacts.
Rumors swirl of Anderson takeover
Houston's Coastal Corp. identified as possible bidder
The Financial Post
Shares of Anderson Exploration Ltd. jumped almost 12% yesterday amid speculation a U.S. company will make a takeover offer soon.
Its shares (AXL/TSE) rose $1.80 to close at $17.25 on volume of 1.4 million shares, more than three times its average of the past three months. They reached an intra-day high of $18.75.
The company issued a statement saying it did not know what caused the surge in the share price. Company officials were not available for comment.
Several analysts fingered Coastal Corp. of Houston as a possible bidder. A company spokeswoman said there is no substance to the rumor. "This is the first we've heard of it," said Vicki Guennewig.
A Calgary-based intermediate, Anderson is gas oriented and has performed well in recent months on investor and analyst expectations that Canadian gas prices will climb this fall as new pipeline capacity comes onstream.
The stock hit a 52-week high of $19.40 on April 16, while the low of $12.50 was set Jan. 12.
The company also owns half of Federated Pipe Lines Ltd., an oil and natural gas liquids pipeline in British Columbia and Alberta. The system currently moves 235,000 barrels a day.
The hope for higher gas prices, plus a strong US$, have caused numerous U.S. companies to flow across the border and snap up properties and firms.
The deals have varied considerably in size. The most recent, Marathon Oil Co.'s announcement last week of a takeover bid for Tarragon Oil & Gas Ltd., totalled US$1.04 billion, including debt.
With a market capitalization of about $2.2 billion, an offer for Anderson would rank behind the sale earlier this year of Norcen Energy Resources Ltd. to Union Pacific Resources Group Inc. for US$3.5 billion.
Gord Currie, analyst with Canaccord Capital Corp. in Calgary, said Coastal as a buyer makes sense because it has agreed to ship 150 million cubic feet a day on the Alliance pipeline. The proposed $3.7-billion line, scheduled to begin operation in 2000, will run from northeast British Columbia to Chicago for access to lucrative U.S. markets. Coastal owns 14.4% of the pipeline, whose fate is now being decided by the National Energy Board.
"Coastal has a chunk of Alliance and Alliance runs right through Anderson's backyard, and Coastal has said it wants reserves to back up that commitment," Currie said.
But Peter Linder, with CIBC Wood Gundy Securities Inc., dismissed the merger talk. "There is no deal in the works," said the Calgary analyst, who believes Anderson is worth $22 a share.
Currie said the combination of gas-weighted assets and the pipeline could prompt a bidding war for Anderson.
Alberta Energy Co. Ltd., another gas-focused independent, concentrates on northwestern Alberta, which is home to much of Anderson's properties.
While energy firms' stocks have slumped with the downturn this year in oil and gas prices, a combination of stock and cash might work for AEC.
"It would be an expensive war, which would limit the number of buyers," he said. AEC does not comment on possible acquisitions, an official said. Other rumored suitors include Apache Corp. of Houston, Devon Energy Corp. of Oklahoma City, Okla., and Chevron Corp. of San Francisco.
Bob Gillon, with John S. Herold Inc. in Connecticut, said founder J.C. Anderson and his management team have done a good job building the company through exploration and acquisitions. "We think highly of the management and have a lot of confidence in them."
He said Coastal has not been very active in the past few years in increasing its exploration and development business.
Anderson reported profit of $11.3 million (9› a share) on revenue of $195.2 million in its first quarter ended Dec. 31. It flowed 561 mmcf/d of gas a day in the quarter, putting it in the top 10 of Canadian gas producers.
It stepped into the upper ranks with its audacious takeover of Home Oil Co. in the fall of 1995, when it beat out a rival bid from much larger Amoco Corp.
PetroCan, Ultramar venture draws fire
Competition
The Financial Post
An $8.5-billion joint venture proposed by Petro-Canada and U.S.-based Ultramar Diamond Shamrock Corp. suffered a major setback yesterday when the federal Competition Bureau expressed "serious concerns" about it under Canada's competition laws.
While the bureau has not decided to block the deal at this point, it has reached a stage in its five-month review where it felt it had to be open about its assessment, said assistant deputy director Jim Bocking.
"We have serious concerns and that was conveyed to them," Bocking said. "They will want to make further submissions to us and bring some other material to our attention and we'll consider it."
He would not reveal what the concerns are because the issue is still under review by the bureau, which is headed by Konrad von Finckenstein.
Petro-Canada, which had first hoped to close the transaction by the second quarter and then by the third quarter, said the Competition Bureau's assessment came as a surprise.
However, the Calgary-based integrated oil company said it's not backing off from the deal. Completion of the joint venture is subject to getting the approval of competition authorities.
"They have questions and concerns about most aspects of the impact of the deal on competition," said spokesman Rob Andras.
"Their level of concern and the degree of scrutiny that they are interested in expressing means we have to spend some time talking to them and really understand what those concerns are and how they can be addressed."
The joint venture, announced Jan. 6, would combine Petro-Canada's and Ultramar's refining and marketing assets in Canada, Michigan and several New England states. The combination would make the operation the largest overall downstream business in Canada.
Jim Stanford, Petro-Canada's president and chief executive officer, billed it as a "refinery and marketing powerhouse" at the company's recent annual meeting. It would operate five refineries with a daily capacity of 500,000 barrels of crude oil, 3,500 retail outlets and would provide heating oil to more than 300,000 customers.
The partnership's initial revenue base is estimated at $8.5 billion.
At least one industry competitor, Shell Canada Resources Ltd., said the joint venture would prompt others in the industry to seek similar partnerships to maintain competitiveness and control costs.
Independent gasoline marketers have for years complained about excessive concentration, which they say is pushing more and more independent retailers out of business.
In a joint release yesterday, the two companies said they are continuing to pursue the joint venture.
"Certainly we are looking at more intensive conversations with the board than we had thought prior to a meeting [held yesterday between the bureau and senior officers of the two companies].
"We will have to really determine what the next few steps are after those conversations."
The bureau usually approves such deals if it is satisfied that they do not lessen competition.
Petro-Canada and Ultramar, based in San Antonio, Tex., have several options, including abandoning the transactions, addressing all concerns, or going before the quasi-judicial Competition Tribunal.
Bocking estimated only 5% of the transactions brought before the board cause serious competition concerns and require remedies.
He dismissed suggestions that the bureau, which will also have to review the two pending large Canadian bank mergers, is sending a signal that it's not going to just rubber stamp transactions.
"Every transaction is different," Bocking said. "We have a team dedicated to this transaction, composed of lawyers and economists and experts. Other things don't matter."
U.S. says its sanctions stalled Bow Valley's Iran bid
The Financial Post
The U.S. claimed yesterday its economic sanctions against Iran are the main reason Bow Valley Energy Ltd.'s bid to develop an Iranian oilfield has stalled.
Undersecretary of State Stuart Eizenstat said Bakrie Minarak Petroleum Ltd., the former Indonesian partner of Bow Valley, bailed out of the US$180-million offshore project because of U.S. sanctions.
"This has delayed the investment of Bakrie's Canadian partner, which must now seek new partners to replace Bakrie and to provide the financial resources necessary to carry out the project," Eizenstat told a congressional committee.
He admitted Bakrie's decision was also linked to the Asian economic crisis, but insisted the Iran-Libya Sanctions Act played an important role.
Dinesh Dattani, vice-president of Calgary-based Bow Valley, said its former partner did not specify why it was dropping out of the project.
Bow Valley is talking to other investors, but has not yet finalized a new financing deal.
The Canadian company is already under investigation by the U.S. Treasury Department for apparently violating the Iran-Libya Sanctions Act in its bid to develop the 117-million-barrel Balal field 66 kilometres off the coast of Iran. But there is little it can do to apply sanctions since Bow Valley has no assets in the U.S. The U.S. government can only seize property or assets inside the country.
The administration is trying to sell Congress on a U.S.-European Union pact that would limit sanctions on European countries under either ILSA or the Helms-Burton law against Cuba.
The deal would allow President Bill Clinton to waive a section of the Helms-Burton law that bars executives from entering the U.S. if their companies are operating on expropriated land in Cuba. Toronto-based Sherritt International Corp.'s directors and executives have been barred from the U.S. under the law.
In exchange, EU members agreed not to give government support to companies from their countries wanting to set up operations on property expropriated in 1959 from U.S. citizens by President Fidel Castro.
The U.S. has dropped its investigation of an Iranian project by France's Total SA and its Malaysian and Russian partners. Eizenstat said there was little it could do, since the companies don't have assets in the U.S.
"We concluded that the imposition of sanctions would not prevent the project from proceeding, though such a step would have had major negative effects on other U.S. interests," he told the House International Relations Committee.
He also said there was little the U.S. could do to force other countries to go along with its sanctions. "We will not succeed by attempting to force our allies to our position. We need to lead them."
Ottawa is unlikely to sign on to the U.S.-EU pact because it disagrees sanctions are an effective way to bring about reform in Cuba.
"There's not a lot of enthusiasm for it," said Dextor Bishop, a spokesman for Canada's Foreign Affairs Department.
Chaos play
Forbes Magazine
One unintended victim of Indonesian chaos is Calgary-based oil producer Gulf Canada Resources (NYSE: GOU). At a recent $4.75 a share, its stock is down from its $9.44 high in September.
Much of Gulf Canada's troubles have to do with bad timing. First, its former chief executive, J.P. Bryan, assumed $770 million in debt to increase the company's oil assets, just as Canadian oil prices-tied closely to West Texas crude-began falling fast. Then Indonesia began its political meltdown, shortly after it hired Goldman, Sachs to sell 28% of its stake in Gulf Indonesia Resources (NYSE: GRL) in an IPO last September. The company still has a 72% stake in its Indonesian subsidiary, which had 1997 revenues of $157 million and contributed 16% of parent GOU's $414 million 1997 cash flow.
NationsBanc Montgomery Securities' analyst Tyler Dann says The Street has overreacted. Most of Gulf Indonesia's assets are on the island of Sumatra-hundreds of miles from the rioting. He also thinks nationalization of the oil industry is highly unlikely, since Indonesia's new military-backed government is eager to reestablish that country's international standing.
Aside from the political turmoil, Gulf Indonesia's business looks strong. Its Corridor natural gas project will soon be capable of producing 160 million net cubic feet of natural gas per day, and by 1999 should account for 22% of parent Gulf Canada's total cash flow. Recent discoveries at an adjacent drilling site, South Jambi "B," also look promising.
Things are looking up in Calgary as well. Gulf Canada's new chief executive, Richard Auchinleck, is setting the balance sheet straight. His goal is to pay down $570 million of debt, and he has already raised $489 million from selling noncore assets in the U.K., the Netherlands and Australia.
Dann thinks Gulf could get a boost this summer after OPEC's June 24 meeting. Production cuts would hike crude prices by as much as 13%, he says, to $17 per barrel.
But even if oil prices stay flat, there's plenty of upside: The value of GRL, trading at a recent $14.25, isn't currently accounted for in GOU's price. One share of Gulf Canada entitles the stockholder to 0.182 shares of Gulf Indonesia, a value of $2.59. Add that to Gulf Canada's current price and you get over $7, a 55% premium to current levels.
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